Research: What JPMorgan Shareholders Should Know About Splitting the CEO and Chair Roles

The board of directors is supposed to keep watch over the CEO, right? So if the CEO also serves as the chairman of the board, you’re setting yourself up for trouble, or so the conventional wisdom goes. The checks and balances are inadequate. The CEO has the run of the place. He or she is free to set compensation, engage in empire building, and make decisions that destroy shareholder value.

Arguments like these are embroidered on the banners of activist shareholders such as AFSCME, which is urging that JPMorgan Chase CEO Jamie Dimon be stripped of his chairmanship at the bank’s meeting of shareholders on May 21.

Shareholder activists are generally well-intentioned, but they’re not always right. They don’t always understand board-CEO dynamics or the firm-specific costs and benefits of splitting the CEO-chairman roles. In research I conducted with Ellen Engel of the University of Chicago and Xiaohui Liu of the University of Texas, Dallas, the data show that separating the CEO and chairman roles is not necessarily associated with improved corporate performance. In fact, we document that companies that were forced to make this change due to pressure from investors performed more poorly, on average, than companies that switched for reasons such as the underlying economics of the business or the strengths and weaknesses of the company’s current leadership.

Note the following caveats to the above statement: First, we didn’t study banks. Second, the word “average” is key.

Firms’ choices of board leadership structures are influenced by several factors, such as company size. Splitting the roles of the CEO and chairman often works well in small firms, where communication between the chief executive and chair is relatively uncomplicated and the amount of information the chairman has to absorb is modest.

But for large, complex companies, separating the roles can create real challenges. A good CEO is on top of a vast amount of detail about the company and is quick on the uptake, making decisions fluently. A chairman often can’t know anywhere near as much as the CEO (in particular with respect to soft or intangible information), and the need for chairman approval of important decisions may create a bureaucratic mess. Sometimes companies get bogged down in disputes between the CEO and the chairman.

For reasons such as these, a few companies have experimented with various governance configurations. Disney, for example, combined the CEO and chairman roles, then separated them because of shareholder proposals, then recombined them.

Typically, companies discover that the issues are nuanced. For example, firms don’t give up checks and balances just because one person holds both titles. As an alternative to splitting the combined CEO-chairman position, boards can appoint what’s known as a lead independent director, who presides over all board and executive sessions. Key functions of lead directors include facilitating and monitoring board discussions and performance, building productive relations with the CEO, enabling effective communications with shareholders, and providing leadership during crises. Moreover, additional safeguards have been implemented, particularly since the passage of the Sarbanes-Oxley Act in 2002: Auditors, investors, and regulators are more vigilant, CEOs and CFOs face financial and personal liabilities (including jail time), and there are greater requirements for real-time disclosure of corporate actions.

Activist shareholders may not understand the subtleties of corporate governance, but they do read the news. Dimon has been in the news a lot, not only because of the worldwide recession but because he received an equity bonus worth some $10 million even after the recent “London whale” trading snafu, in which his bank lost more than $6 billion. Shareholders are angry about that.

But stripping JP Morgan Chase’s CEO of the chairmanship may be counterproductive over the long term. If stakeholders want him to be their leader, they should let him lead. Let him follow his vision. They shouldn’t compromise the bank’s future performance just because they want to take Jamie Dimon down a peg.

Aiyesha Dey is an assistant professor of accounting in the Carlson School of Management at the University of Minnesota.